UNIT 13 CHECKPOINT EXAM Flashcards
Of the standard Federal Reserve tools, which of these is considered the most powerful and used infrequently?
A) Reserve rate
B) FOMC activities
C) Discount rate
D) Quantitative easing
A) Reserve rate
Explanation
The reserve rate (i.e., the amount member banks keep on deposit at the Federal Reserve for liquidity) has the most dramatic impact when changed. It is rarely changed.
First Amalgamated Bank of Buffalo, a large commercial bank, is a member of the Federal Reserve System. Should the bank need to increase its reserves, it could do which of these?
I. Borrow from the FRB and pay the discount rate.
II. Borrow from the FRB and pay the federal funds rate.
III. Borrow from another member bank and pay the discount rate.
IV. Borrow from another member bank and pay the federal funds rate.
A) II and IV
B) II and III
C) I and IV
D) I and III
C) I and IV
I. Borrow from the FRB and pay the discount rate.
IV. Borrow from another member bank and pay the federal funds rate.
Explanation
When a bank needs to borrow money to increase its reserves, it can borrow from the Federal Reserve Bank or it can borrow from another member bank like itself. When borrowing from the FRB, the banks pay the discount rate. When borrowing from another member bank, the banks pay the federal funds rate.
M1 is a measure of the value of
A) M2 plus retail CDs and money markets.
B) cash, cash equivalents, and DDAs.
C) retail CDs and money markets.
D) cash and funds held in DDAs.
D) cash and funds held in DDAs.
Explanation
M1 is the tightest of the money supply measures, including only actual cash in circulation and funds in demand deposit accounts (DDAs) (e.g., checking and savings accounts).
It is generally agreed upon that the most volatile interest rate in the U.S. economy is
A) the federal funds rate.
B) the prime rate.
C) the call money rate.
D) the discount rate.
A) the federal funds rate.
Explanation
The federal funds rate is the rate the commercial-money-center banks charge each other for overnight loans of $1 million or more. It is considered a barometer of the direction of short-term interest rates, which fluctuate constantly. Therefore, the federal funds rate can be considered the most volatile rate in the economy.
Which of these is not a tool used by the Federal Reserve Board (FRB) to impact the money supply?
A) Changing the reserve requirements
B) Changing the prime rate
C) Changing the discount rate
D) Open market operations of the FOMC
B) Changing the prime rate
Explanation
The prime rate is set by money-center banks, not the FRB. The remaining answer choices are the tools available to the FRB, which affects the money supply.
The Federal Reserve is concerned that the economy is slowing. With this in mind, which of these actions would the Federal Reserve most likely engage in?
A) Engage in open market sales of T-bills
B) Pursue an easy-money policy to lower interest rates
C) Double the reserve requirements for member banks
D) Raise the margin requirements under Regulation T
B) Pursue an easy-money policy to lower interest rates
Explanation
Monetary policy is implemented by the FRB. Monetary policy attempts to control the supply of money to influence the level of interest rates which, in turn, will either stimulate or dampen the U.S. economy. If the FRB believes the economy is sluggish and needs to be stimulated, it will attempt to lower interest rates by pursuing an easy-money policy. Lower rates are designed to encourage borrowing in an effort to stimulate growth. Raising margin rates or reserve requirements is considered a tightening action, which will dampen economic activity. Selling T-bills will reduce the money supply and raise rates, which is also a tightening action.
Seacoast Securities, a FINRA member firm and a large corporation, needs to secure funds to cover customers’ margin purchases. Seacoast reaches an agreement to borrow from a large money-center bank for a loan that the bank can terminate with 24 hours’ notice. The rate that the bank charges Seacoast for this loans is called
A) the prime rate.
B) the discount rate.
C) the broker call loan rate.
D) the federal funds rate.
C) the broker call loan rate.
Explanation
A broker-dealer borrows funds to use in margin purchases at the broker call loan rate, and these loans may be called with a one-day notice. The use of the funds classifies this as a broker call loan. Seacoast may borrow for other purposes at the prime rate, but not for this activity.
The Federal Reserve’s dual mandate includes which of these?
I. Maintaining maximum employment
II. Enforcement of price controls
III. Control the value of the dollar versus other currencies
IV. Price stability
A) I and II
B) I and IV
C) II and III
D) III and IV
B) I and IV
I. Maintaining maximum employment
IV. Price stability
Explanation
The dual mandate is to maintain maximum employment while keeping inflation in check (price stability). They do not enforce price controls. They may takes steps to manage the value of the dollar, but this is not a part of the dual mandate.
Under the dual mandate, the Federal Reserve is most concerned with achieving
A) minimum unemployment and maximum money supply.
B) maximum employment and managing taxation.
C) federal spending and debt.
D) maximum employment and controlling inflation.
D) maximum employment and controlling inflation.
Explanation
The dual mandate is designed to give this independent government agency two goals: maintain a healthy economy that supplies jobs enough for job seekers and keep prices from fluctuating aggressively. Some inflation is considered healthy. The Federal Reserve has inflation and unemployment targets.
The Federal Reserve pursues its dual mandate through
A) trade policy.
B) monetary policy.
C) fiscal policy.
D) economic policy.
B) monetary policy.
Explanation
The Federal Reserve is tasked with using monetary policy to manage the economy. Fiscal policy—taxation and spending—is managed by the legislative and the executive branch. Trade policy is driven primarily by the executive branch, and all of this is part of economic policy.
Which of these does M2 measure?
I. M1
II. M3
III. Term repos and jumbo CDs
IV. Retail CDs and money markets
A) II and IV
B) II and III
C) I and IV
D) I and III
C) I and IV
I. M1
IV. Retail CDs and money markets
Explanation
M1 is a component of M2 and adds retail CDs and money markets. M2 is a component of M3, plus term repos and jumbo CDs.
